Federal Court of Australia

Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 2) [2023] FCA 638

ORDERS

THE COURT ORDERS THAT:

1.    The application is dismissed.

2.    The first and third defendants pay the plaintiff’s costs of the application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    By an action commenced on 4 April 2023, the plaintiff, Canstruct Pty Ltd (Canstruct), seeks orders that a Deed of Company Arrangement (DOCA) executed by the first defendant, Project Sea Dragon Pty Ltd (subject to a deed of company arrangement) (Project Sea Dragon), be terminated. The relief is sought on several grounds, including that information provided to creditors prior to the DOCA being entered into was misleading, that the DOCA is unfairly discriminatory as against Canstruct, or is unfairly prejudicial to and/or contrary to the interests of the company’s creditors. Canstruct seeks a subsequent order that Project Sea Dragon be wound up.

2    Some preliminary matters have occurred in the proceedings, including the granting of interlocutory injunctive relief restraining the deed administrators from distributing the Deed Fund constituted under the DOCA.

The present application

3    By the present application, Project Sea Dragon and its parent company, the third defendant, Seafarms Group Limited, seek discovery of a limited range of documents. In order to identify the matters in issue, it is necessary to refer to some of the background events that have occurred as between the parties, but only to the extent that they relate to the points presently arising for consideration.

4    Project Sea Dragon is a special purpose company that was incorporated for the development of a major project in the prawn aquaculture business. The project is of a substantial size and involves the expenditure of tens of millions of dollars.

5    Project Sea Dragon engaged Canstruct to undertake construction and development works at one of the project sites in the Northern Territory.

6    Those parties entered into an agreement referred to as the “Framework Agreement”, dated 10 May 2021, under which Work Orders were issued. It is apparent that a substantial sum has already been paid to Canstruct pursuant to that agreement for work performed under the Work Orders.

7    A dispute arose between Canstruct and Project Sea Dragon in relation to the former’s entitlement to be paid for certain work performed under those Work Orders, for which it had issued payment claims. That disputation resulted in the making of an award by an adjudicator under the Construction Contracts (Security of Payments) Act 2004 (NT) in favour of Canstruct in the amount of over $15 million, albeit that this was later adjusted to approximately $14 million (including GST).

8    Following the handing down of the award, Project Sea Dragon went into administration and ultimately entered into the DOCA, which is now the subject of these proceedings. Canstruct alleges that the entry into of the DOCA amounted to a misuse of the provisions of Part 5.3A of the Corporations Act 2001 (Cth) (Corporations Act) in several ways. On the prior application for an interlocutory injunction, it satisfied the evidentiary and persuasive onuses to the standard required for the grant of orders of that type.

9    The matter is now set down for hearing and directions have been made for the purpose of ensuring that the hearing takes place on the dates specified.

Nature of the application

10    The present application for discovery was advanced by Project Sea Dragon and Seafarms Group Limited on the basis that they challenge Canstruct’s assertion that it is a creditor of Project Sea Dragon in the sum of approximately $14 million. It is said that, whilst the adjudicator’s decision determined that Canstruct was owed that amount, the figure derived in the adjudication was erroneous.

11    It has produced evidence that Canstruct has not paid to one of its subcontractors, RSA Contractors, a sum of $4.5 million in respect of work said to have been carried out by RSA Contractors for Canstruct under certain of the Work Orders. It is also said that Canstruct has denied liability to RSA Contractors in respect of its claims. That matter is, or has been, the subject of an adjudication application.

12    In broad terms, it was submitted that Project Sea Dragon requires the documents relating to the dispute between Canstruct and RSA Contractors in order to ascertain its actual level of indebtedness to Canstruct.

13    A party is not entitled to discovery in the Federal Court as of right, and the Federal Court Rules 2011 (Cth) (Rules) prohibit parties from making discovery otherwise than pursuant to an order of the Court. Instead, an application for discovery may be made under r 20.13 of the Rules, which allows for general or specific discovery. In both cases, the Court will only order the production of documents that are “directly relevant” to an issue in the proceedings.

14    It is also relevant that r 20.11 of the Rules provides:

20.11 Discovery must be for the just resolution of the proceeding

A party must not apply for an order for discovery unless the making of the order sought will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible.

Whether Canstruct is a creditor

15    The documents sought by way of the present application are as follows:

(i) Any documents relating to a dispute between the Applicant and its subcontractor RSA Contractors with respect to the works performed under the Work Orders issued in accordance with the terms of the Framework Agreement dated 27 September 2021 between the Applicant and the First Respondent including any:

(A    payment claims by RSA Contractors;

(B)     payment responses by the application;

(C)     adjudication application by RSA Contractors;

(D)     adjudication application submissions by RSA Contractors;

(E)     adjudication responses by the Applicant;

(F)     adjudicator's decision/s; and

(G)    any correspondence between the applicant and RSA Contractors relating to the disputed payment claims issued by RSA Contractors in respect of work performed under the Framework Agreement.

16    There was some difficulty in ascertaining precisely the issue to which the documents sought were said to be directly relevant.

17    Initially, it appeared that Project Sea Dragon asserted that its liability to Canstruct under the Framework Agreement was dependent upon Canstruct’s liability to RSA Contractors, such that the documents relating to the disputation with RSA Contractors were directly relevant to the current proceedings and Canstruct’s standing as a creditor. In the written submissions of Project Sea Dragon and Seafarms Group Limited, it was said:

8.    The solicitor for the first and third respondents, Mr Cliff has sworn on information and belief that examination of the documents relevant to the dispute between RSA and the applicant is required to properly analyse how much the first respondent has paid the applicant which has not been paid to RSA and of the adjudication amount of $14 million relates to work which was performed by RSA and the applicant disputes.

18    On the evidence available on this application, it appeared that the adjudication decision by which Canstruct was found to be owed approximately $14 million by Project Sea Dragon did not involve consideration of the nature and extent of its liability to RSA Contractors. Rather, the adjudicator determined the matter based upon the work that was done and Project Sea Dragon’s liability to Canstruct for undertaking it. It is apparent that the adjudicator was unconcerned about the extent to which Canstruct had discharged its liabilities, if any, to subcontractors. The concern was with the liability that had accrued to Project Sea Dragon in respect of the work done by Canstruct for the purposes of the Framework Agreement and the Work Orders issued under it. The Court was not taken to any provision of that agreement to the effect that Project Sea Dragon only became liable to Canstruct where the work was performed by a subcontractor and that subcontractor was paid.

19    In these circumstances, the documents in question did not appear to be directly relevant to the issues that might arise in these proceedings.

20    In the course of the hearing, a second ground was advanced as to why the documents sought by way of the discovery application were relevant. Specifically, it was submitted that, on the application to set aside the DOCA, it will be relevant to the Court’s discretion under, inter alia, s 445D of the Corporations Act to consider all of the relevant circumstances, including the extent to which, if the DOCA is set aside and Project Sea Dragon is wound up, it is likely that liquidation will provide a better outcome for creditors. In this case, Canstruct has advanced the proposition that there is a real chance that a liquidator will be able to pursue a claim of insolvent trading against the directors of Project Sea Dragon and its parent company, Seafarms Group Limited. Whether that is so or not will depend upon the date of Project Sea Dragon’s insolvency and the level of its indebtedness from that date. So the submission went, Project Sea Dragon and Seafarms Group Limited wish to contest that Canstruct is a creditor or, if it is, the amount of its debt, which will be relevant in ascertaining the extent to which recovery proceedings might be pursued against those companies in a liquidation scenario.

21    In this respect, it was submitted for Project Sea Dragon and Seafarms Group Limited that the documents for which discovery is sought are directly relevant to the nature and extent of the work performed by Canstruct (or its subcontractors) under the Framework Agreement with Project Sea Dragon. In particular, questions were raised as to whether Canstruct was entitled to approximately $4.5 million in respect of certain demobilisation costs and, also, as to the extent to which the demobilisation work for which payment was claimed was, in fact, carried out. The documents sought were said to go to the factual issue of whether the work was done, as opposed to Canstruct’s liability to RSA Contractors for undertaking it.

22    Canstruct submitted, and established on the evidence, that the amounts awarded by the adjudicator in respect of its claims against Project Sea Dragon were determined on the basis of its entitlements to certain lump sum amounts in the Framework Agreement (including its various schedules and appendices), or agreed rates for specific work set out in that agreement. Whilst that may be so, those amounts could only have been awarded on the basis of some evidence that the work in respect of which they were claimed had been completed. It is this issue that was belatedly identified as the key to the relevance of the documents that are now the subject of this application.

23    The material did reveal that an issue existed in relation to the extent of the demobilisation of RSA’s offices from the Project Sea Dragon site. It appears that, in the performance of its obligations under the relevant Work Orders, Canstruct instructed RSA Contractors to demobilise those assets and fixtures, but that Project Sea Dragon intervened and sought to prevent that from occurring because it wished to negotiate for their acquisition. Apparently, an amount of $1.3 million was allowed by the adjudicator for this demobilisation, even though it had not occurred. There is, therefore, a dispute as to whether or not that amount is properly payable to Canstruct, and issues of contractual interpretation and contractual rights might arise therein. In this way, documents evidencing whether the work for which Canstruct was awarded certain amounts in adjudication was actually undertaken can be said to be directly relevant to the existence and size of the debt that Canstruct claims from Project Sea Dragon and, as a result, to the question as to whether it is in the interests of creditors that the DOCA be set aside.

24    The problem with the present application, however, is that it does not seek discovery only of documents that evidence or relate to whether the work the subject of the Work Orders was performed. Rather, it seeks discovery of all documents “relating to a dispute between the Applicant and its subcontractor RSA Contractors with respect to the works performed under the Work Orders issued in accordance with the terms of the Framework Agreement”. The scope of the documents identified in the application does not cohere with the purpose for which those documents are apparently sought. Indeed, the application covers a wide range of documents, many of which have no connection with what work was actually performed. Though it would possibly catch those documents that show the extent to which the relevant work was undertaken, it is not so limited, and would also capture documents relating to any and all disputes between RSA Contractors and Canstruct regardless of whether they related to the completion of that work. In that way, the scope of the documents sought would extend to matters that may be in dispute between Canstruct and RSA Contractors but not in dispute between Canstruct and Project Sea Dragon.

25    It follows that, whilst there may well be a legitimate point in respect of which discovery could be ordered, the production of the documents identified in the present application would be an unsuitable means by which to have evidence adduced on that point.

26    It must also be added that, in exercising the discretion to direct one party to make discovery, the Court is guided by r 20.11 of the Rules, such that it should be considered whether making the order “will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible”. Here, it is apparent that Project Sea Dragon had employed Mr Snaebjorn Jonasson as a Project Manager, and that he had day-to-day management of the development of the project infrastructure. It appears that he had some role in the dispute that was the subject of the adjudication between his employer and Canstruct. One might expect that he presently has knowledge of the manner in which the development progressed, and it would appear that he or another person was responsible for the consideration and certification of payment claims made by Canstruct. It is not irrelevant to note that the payment claims in respect of which the adjudication occurred were assessed and paid (at least in part) by Project Sea Dragon, and it can be expected that those persons who were involved in that process were, and are now, aware of the nature and extent of the work performed on the site. It is likely that, for the purposes of the issues that might arise in this matter, knowledge of the necessary facts would be held by the officers or employees of Project Sea Dragon or Seafarms Group Limited. It follows that it would not accord with the objectives outlined in r 20.11 to require Canstruct to undertake discovery of an additional range of documents relating to a dispute with its subcontractor, even if some of them could be said to be relevant in some way.

27    It should also be acknowledged, finally, that Canstruct was accepted to be a creditor of Project Sea Dragon in the course of its administration, including, relevantly, for the purposes of voting on the company’s entry into the DOCA. Moreover, as appears from the circumstances of the earlier application, Project Sea Dragon and Seafarms Group Limited perceived the former company’s potential indebtedness to Canstruct to be around $8.7 million, provision having been made in the accounts of the parent company for such a sum to be paid to Canstruct to settle the dispute. On that basis, the relevance of the issue on which discovery is sought diminishes substantially, as the generally accepted background suggests that Canstruct was (and remains) a substantial unpaid creditor for whom recovery actions pursued by a liquidator may provide significant benefits.

28    On that basis, even if the scope of the documents sought by way of this application was to be more narrowly and appropriately defined, I would not have exercised the discretion to require discovery.

29    It follows that the application is dismissed with costs.

Associate:    

Dated:    13 June 2023